How Far Will Stocks Fall?

By Jim Walker on Wednesday, April 20th, 2016 |
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You don’t have a profit until you take a profit goes the old investing saying. If you have seen your portfolio rise in the wake of the Great Recession it may be time to take that profit. CNBC speculates that stocks could drop 25% or more.

The first month and a half of 2016 was brutal for the U.S. equity market, as the major averages plunged over 10 percent. But since hitting the February lows, the market has managed to hobble back, with the Dow Jones Industrial Average closing above 18,000 for the first time on Monday.

The sad truth is that there isn’t any solid fundamental factor to drive stocks higher. Therefore, investors have misplaced their hopes on betting the inflation produced from a falling dollar will be able to bail out the entire market.

The weakening dollar may well help US manufacturers compete in world markets but the world economy is slowing. A larger slice of a smaller pie will probably amount to the same amount of pie in the end. How far will stocks fall? CNBC says 25% or more. How about other projections?

Not All Stocks Are Headed Down

Bloomberg Business reports that U.S. stocks climb as investors watch earnings reports.

U.S. stocks advanced, with the Dow Jones Industrial Average closing above the 18,000 level for the first time since July, as investors shook off oil’s losses on failed output talks and looked toward a bevy of corporate earnings this week.

Morgan Stanley has seen profits sink by half and its stock slide from $40 a share to $25 a share over the last nine months. On the other hand Hasbro has gone from $65 last December to $85 now largely on the strength of its toys that are tied to the successful Star Wars movies. The point is that while some stocks that are tied to the U.S. economy may lose ground there are unique stocks in unique niches that will rise. And of course there are always consumer goods stocks that tend to weather bad markets fairly well. For example Clorox is selling in the $130 a share range compared to the $100 a share range a year ago. So, as you wonder how far stocks will fall consider which stocks, which market sector and what products they are selling.

Offshore Might Be Another Matter

The banker who accurately predicted the demise of Japan’s run to become the world’s first economy says that China faces a make-or-break moment according to Bloomberg. It is all about debt.

China’s decades of rapid development under tight Communist Party control may be coming to an end, according to Roy Smith, the New York University academic who as a banker in 1990 anticipated Japan’s decline.

“China has now arrived at an existential moment after nearly 40 years of extraordinary economic progress,” said Smith, who also warned about budding Japan-like financial strains ahead of the Chinese stock rout in 2015. The country’s “increasingly complex and troubled economic and social system with all its scarcities” will make it tougher for Communist cadres to manage, he said.

So, while stocks may fall as much as 25% in the West the odds are getting stronger that stocks in China have a lot farther to fall, especially if the country descends into social and political chaos.